Tesco's strong Christmas puts sheen on weak third quarter

Tesco's fortunes turned around over the Christmas period, with an impressive like-for-like sales improvement following another decline in the third quarter.

Group LFL sales bounced back with a 2.1% rise in the six weeks to 9 January, with the UK LFLs climbing 1.3% as the prior year's three '£5 off £40' national coupon campaign was abandoned.

Investors will hope this indicates Tesco has turned over a new leaf, rather than being just a flash in the pan, as the prior 13-weeks to 28 November saw UK sales decline to 1.5%, though this still beat market forecasts.

Over the full 19 weeks to 9 January, LFLs grew by 0.4%, though at actual currency rates, sales declined 2.2%.

Chief executive Dave Lewis put the Christmas improvement down to lower prices, a strong product range and much improved customer service.

"Put simply, we put customers at the heart of everything we did and they responded by buying more of what they needed at Tesco."

UK volumes were up by 3.5% over Christmas and transactions up by 3.4%, hinting that healthy trading returned, for that period at least.

Tesco also saw LFL sales growth in its large Extra hypermarkets, where merchandise was a strong seller, with clothing sales growing significantly ahead of the market, in particular ladies fashion and knitwear ranges.

International sales also provided a boost, with a 4.1% gain over Christmas helped by improvements across the offer that drove sales in both Europe and Asia, with the Thai business reaching its highest ever market share.

Well received results

Investors and analysts were impressed, with the shares leading the FTSE 100 risers on Thursday.

"We believe that the group has delivered a good and very encouraging update that is justifiably pleasing for the management team to our minds," said Clive Black at Shore Capital. "Indeed, with steady self-improvement, we see scope to be that little brighter in mood about the listed UK superstore groups following a broadly encouraging week of trading updates."

Credit agency Moody's also said the confirmation of operating profit guidance "somewhat eases" the negative pressure on the current Ba1 debt rating. "As we have previously stated, the company’s profitability in the second half of fiscal 2015/16 needs to improve after the steep first-half decline in order to maintain the Ba1 rating and stable outlook."

Richard Hunter at Hargreaves Lansdown also bemoaned the lack of a meaningful dividend, meaning "investors are not being paid to wait", though reasons to be cheerful included marked signs of improvement at mobile, international and Tesco Bank.

The fact that much remains to be done was not forgotten, as articulated by Himanshu Pal, retail insights director at Kantar Retail, who said while Lewis’ turnaround plan has started to bear fruit, the road ahead remains ifficult.

He said the UK’s largest grocer was both battling discounter-led price war chipping away at sales market share an profitability, together with growing shareholder pressure around improved returns on investment (ROI) by not only improving P&L but also optimising the balance sheet.

Pal expects Lewis to have to make further tough decisions mainly around cash generation, including further divestments and store closures, and possible staff optimisation, as well as subsequent cash deployment to fund price wars and improve multi-channel capabilities.

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